VELESTO secured a drilling contract from Roc Oil for the Naga 2 rig worth USD14 million. As stated in Kenanga Research’s Company Update on Velesto, overall the research house is positive on the contract win, being reflective of a resurgence of rig demand in the market.
Its share price has more than doubled since the research house’s upgrade its call to OUTPERFORM in Sep 2022. While its outlook remains positive, it believes Velesto’s valuations are rich at the current level. Hence, the research house has maintained its forecasts and target price (TP) of RM0.16 but has downgraded its call to UNDERPERFORM.
Naga 2 contract from Roc Oil. VELESTO has received a letter of award from Roc Oil (Sarawak) Sdn Bhd for the provision of jack-up rig drilling rig services. The contract is for the Naga 2 jack-up rig to drill three firm wells, with an estimated contract value of USD14 million and an estimated commencement date of between 25 Jan 2023 to 25 Feb 2023.
Some of takeaways from the contract win:
*Key assumptions. Based on the job scope, it is reckoned that the duration of the contract should be around 4 months. Assuming approx. 30% of the contract value are add-ons, this implies a daily charter rate of approx. USD80k. This is higher than VELESTO’s historical day rates over the past few years of around USD70-75k and is reflective of the current up trending rates in the market amidst the demand resurgence. Hence Kenanga expects the contract to fetch an EBITDA margin of ~45% which is in-line with historical average. The Naga 2 rig is currently also servicing Roc Oil, and hence, this contract award can also be somewhat seen as an extension contract from an existing client.
*More wins to come. Kenanga is positive on the contract win, as this is reflective of a resurgence of rig demand and activity level in the domestic market. Being Malaysia’s largest jack-up drilling rig provider, VELESTO is poised to benefit from this resurgence in demand. As such, with this being the first contract win for the year, it is believed more wins will come to quickly fill up VELESTO’s rig schedule for the rest of the year.
Forecasts. No changes to Kenanga’s current forecasts as the new win is deemed to fall well within our assumptions. Our FY22F/FY23F earnings are based on a rig utilisation assumption of 60%/80% and average daily charter rates assumption of USD75k/85k.
However, Kenanga has downgraded Velesto’s shares to UNDERPERFORM (from OUTPERFORM previously), with an unchanged TP of RM0.16 – pegged to 15x PER, in-line with the ascribed valuations for other local-centric equipment and service providers within its coverage universe (e.g. DAYANG). There is no adjustment to its TP based on ESG given a 3-star rating.
VELESTO is slated as a prime beneficiary of the resurgence of the local drilling market, its current valuations are already rich. Since Kenanga’s OUTPERFORM call in Sep-2022, the stock has performed tremendously – having more than doubled. As such, the research house sees this as an opportunity for investors to realise some profits.
Risks to identified include oil prices scaling new highs; and oil production rig market continues to tighten, taking daily charter rates higher.
